The importance of trade cannot be overestimated, yet the media and establishment politicians continually downplay its importance to our Country. I would like to think it is just shortsighted stupidity but I fear their motivation more nefarious. In very basic terms, a trade surplus is beneficial and a trade deficit is detrimental.
The balance of trade is calculated as the difference between the goods (and services) imported vs. exported. Higher exports produce a surplus. GDP or Gross Domestic Product is the total value of everything produced by all people and companies in the country. Nominal GDP is adjusted (primarily for inflation) so year over year or quarter over quarter comparisons reflect apples to apples. The adjusted figure is Real GDP. Imports and exports have opposite effects on GDP. Exports add to GDP and imports subtract. In 2017 exports, added $2.329 Trillion and imports subtracted $2.895 Trillion for a net trade deficit of $566 Billion.
The mainstream media knows this yet they suppress, camouflage and obfuscate the facts on trade, presumably to keep the public in the dark. Everything the Trump administration is doing in International Trade will benefit America enormously. The United States has run a trade deficit for 42 consecutive years. In that time, the US has accumulated $11.6 Trillion trade deficits. Is there anyone who thinks that is good?
NAFTA or North American Free Trade Agreement is a trade pact with the United States, Mexico and Canada signed in 1994. It is great for Mexico and Canada but for the USA, not so much. Their goods and services come in without a tax (tariff) or a very small one, while they murder our exports with abusive tariffs. That qualifies as “stupid trade,” which the President has referred to frequently. Our trade deficit (2017) with Canada was $17B and an astounding $71B with Mexico. Tariffs (or threats) will establish a level playing field for American manufacturers, farmers and service providers or cause our partners to lower or eliminate their tariffs. Trump has been very clear on this—reciprocity is the operative word for trade deals. Think of the policy as a “mirror tax.” If a country charges us a 5% tariff, they will be charged 5%. If they charge us 50%, we will charge them 50%. We may not get to parity immediately but any improvement is well worth the effort. The elegance of his strategy is:
- We can’t lose—it cannot be any worse [refer to $11.6T cumulative deficit]
- No one can make a substantive argument for our trading partners getting a free ride while American businesses get hammered
- Our booming economy is the envy of the world and they all want to sell here [leverage]
- Our position only gets stronger with dominance in energy—as energy imports were the biggest factor in our deficits!
We saw the EU “blink” last week opening up energy and agricultural markets to US business. That will start to offset the $151B trade deficit with the EU (2017). The US and EU together account for over 50% of the world output and have a bi-lateral trade relationship over $1 Trillion. The agreement announced will work toward zero tariffs, zero barriers and zero subsidies (non-auto). This puts enormous pressure on China, which is the biggest trade abuser and currency manipulator by far. In 2017, we ran a $375B trade deficit and they pummel our exports with punitive tariffs and larcenous rules for American company participation in their markets. You have no doubt heard the President talk about the theft of Intellectual Property [IP], specifically by China where patents are not recognized. Here is why it is a big deal; in 2017 Intellectual Property, as measured by royalties and license fees, accounted for $75 Billion in trade surplus. If IP is stolen and knock-offs produced, there are no corresponding royalties or license fees collected on those products! Estimated IP theft is larger than the existing trade deficit—every year!
The stakes are extremely high and there is no doubt China will fold. They have a growth rate less than half ours, a stock market off 20% (under pressure) and a massive build up in corporate debt, which is right now taking a toll:
The Trump Administration has already decreased the trade deficit by $52B last quarter, which is worth one GDP point of growth. As the trade deals are negotiated and the deficit comes down, the GDP growth rate is accelerated. We are no longer the piggy bank of the world. The days of plundering American jobs and American wealth are over. It is America First from here on out!